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Hall Street Meets Pearl Street: Stolt-Nielsen and the Federal Arbitration Act’s New Section 10(a)(4)

May 29th, 2009 Arbitrability, Authority of Arbitrators, Awards, Grounds for Vacatur, Practice and Procedure, United States Court of Appeals for the Second Circuit 11 Comments » By Philip J. Loree Jr.

Introduction

Victoria VanBuren’s May 4, 2009 guest post,  Hall Street Meets S. Maestri Place: What Standards of Review will the Fifth Circuit Apply to Arbitration Awards Under FAA Section 10(a)(4) after Citigroup? (available here), looked at the scope of Section 10(a)(4) in the Fifth Circuit after Hall Street Assoc. v. Mattel, Inc., 128 S. Ct. 1396 (2008) and Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). Today we look at the scope of Section 10(a)(4) in the Second Circuit after Hall Street met Pearl Street in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. filed Mar. 26, 2009 (No. 08-1198), in which the Second Circuit said that, notwithstanding its prior case law suggesting otherwise,  “manifest disregard of the law” is not an independent basis for vacating an arbitration award foreclosed by Hall Street, but one encompassed within Section 10(a)(4)’s prohibition against arbitrators “exceed[ing] their powers.  .  .  .”  As we shall see, the Second Circuit justified that holding by taking a more expansive view of Section 10(a)(4) than it previously had, a view that may also permit challenges based on “manifest disregard of the agreement.” 

The Scope of Section 10(a)(4) Prior to Stolt

Section 10(a)(4) of the Federal Arbitration Act allows a court to vacate an award where the arbitrators have “exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.”  9 U.S.C. § 10(a)(4)).  Prior to Stolt the Second Circuit construed Section 10(a)(4) quite narrowly in commercial cases, effectively limiting it to questions of arbitrability:  “[o]ur inquiry under § 10(a)(4) .  .  . focuses on whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided the issue.”  See DiRussa v. Dean Witter  Reynolds Inc., 121 F.3d 818, 824 (2d Cir. 1997) (emphasis added), cert. denied, 522 U.S. 1049 (1998).     

This narrow, textual analysis of Section 10(a)(4) left unaddressed some rare, but not unheard of, scenarios where the arbitrators had the authority to reach the question presented, but resolved it in a way that had no colorable basis in the law or the parties’ contract.  One of these scenarios is where arbitrators “manifestly disregard the law,” that is, deliberately or recklessly disregard law that indisputably controls and indisputably requires an outcome materially different from that of the arbitration award.   Another is where arbitrators “manifestly disregard the agreement,” that is, deliberately or recklessly disregard indisputably controlling contract terms requiring a materially different outcome, or issue an award that is not even arguably derived from the contract.  

The Second Circuit’s pre-Stolt commercial arbitration cases addressed these rare situations principally through the doctrine of manifest disregard of the law, which it considered an “independent” ground for vacatur not set forth in Section 10.  Vacatur under this standard was allowed where the arbitrators were aware of a clearly governing legal principle but either:  (a) expressly refused to apply it; or (b) issued a decision that “strains credulity” or “does not rise to the standard of barely colorable,” allowing the court to infer that the arbitrator willfully disregarded governing law by refusing to apply it.  Stolt, 548 F.3d a 92-93.

Stolt and the New Section 10(a)(4)

Hall Street, however, held that the grounds for vacating commercial arbitration awards were limited to those set forth in Section 10, and that “manifest disregard of the law” was not a basis for vacating an arbitration award to the extent that it was independent from the grounds specified in Section 10.  See 128 S. Ct.at 1404.  Hall Street forced the Second Circuit to resolve a quandary:  its narrow construction of Section 10 left unaddressed instances where an arbitrators’ award effectively denies one of the parties the benefit of the bargain it struck when it agreed to arbitrate, but Hall Street foreclosed any reliance on “independent” or non-statutory grounds for vacatur, such as manifest disregard of the law, which previously provided an avenue to address such cases.  The Second Circuit had to choose between retaining its narrow, textual construction of Section 10(a)(4) – and sacrificing its ability to remedy situations that previously were dealt with under the manifest disregard of the law standard – or retaining the flexibility to grant relief in those rare instances where the arbitrators decided an issue within the scope of their authority, but issued an award that had no colorable basis in the law or the parties’ contract.  Perhaps not surprisingly, the Second Circuit elected to adopt a more expansive view of Section 10(a)(4).  

To support a more expansive reading of Section 10(a)(4) the Court adopted Judge Posner’s prescient and insightful analysis of the function of Section 10 of the Federal Arbitration Act in a case decided before Hall Street:   

It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but they are not.  When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. – conduct to which the parties did not consent when they included an arbitration clause in their contract.  That is why in the typical arbitration .  .  .  the issue for the court  is not whether the contract interpretation is incorrect or even wacky but whether the arbitrators had failed to interpret the contract at all, for only then were they exceeding the authority granted to them by the contract’s arbitration clause.  

Wise v. Wachovia Sec., LLC,  450 F.3d 265, 269 (7th Cir.) (citations omitted), cert. denied, 549 U.S. 1047 (2006). 

The Second Circuit said that “[l]ike  the Seventh Circuit, we view the ‘manifest disregard’ doctrine, and the FAA itself, as a mechanism to enforce the parties’ agreements to arbitrate rather than as judicial review of the arbitrators’ decision.”  548 F.2d at 95.  The Court reasoned that where “the arbitrator knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it,” “the arbitrators have ‘failed to interpret the contract at all,’ for the parties do not agree in advance to submit to arbitration that is carried out in manifest disregard of the law.”  548 F.3d at 95 (quoting Wise, 450 F.3d at 269; other quotations omitted; citations omitted).  In that case, said the Court, the “arbitrators have thereby ‘exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.'”  548 F.3d at 95 (quoting 9 U.S.C. § 10(a)(4)). 

Beyond Mere Manifest Disregard of the Law

The Court’s decision to interpret Section 10(a)(4) as encompassing situations where the arbitrators “failed to interpret the contract at all” expanded  Section 10(a)(4)’s reach beyond cases involving only arbitrability questions or manifest disregard of the law.  If, as the Court in Stolt held, “manifest disregard of the law” is a ground for vacatur falling under Section 10(a)(4) because it constitutes a failure to “interpret the contract at all”, so too, must  “manifest disregard of the agreement” fall within the scope of Section 10(a)(4).  

At least in labor cases governed by Section 301 of the Labor Management Relations Act,  the Second Circuit had prior to Stolt allowed vacatur under Section 10(a)(4) where the award “failed to draw its essence from the collective bargaining agreement”, a ground for vacatur endorsed by the Steel Workers Trilogy line of cases.  See, e.g., Re Marine Pollution Service, Inc. v. Brotherhood of Teamsters, Chauffers, Warehousemen & Helpers, 857 F.2d 91, 94 & 96 (2d Cir. 1988).  This ground for vacatur might be termed “manifest disregard of the agreement.”   

Prior to 2001, the Court had, in at least one commercial case, drawn upon this labor precedent, and applied “a notion of ‘manifest disregard’ to the terms of the agreement analogous to that employed in the context of manifest disregard of the law.”  Yusuf Ahmed Alghanim & Sons v. Toys ‘R’ Us, Inc., 126 F3d 15, 25 (2d Cir. 1997), cert. denied, 522 U.S. 1111 (1998).   In 2001, however, the Second Circuit held in Coca-Cola Bottling Co. v. Soft Drink & Brewery Workers Union, 242 F.3d 52, 54 (2d Cir. 2001), that LMRA Section 301 set forth a substantive body of federal law for reviewing arbitration awards that is “analytically distinct from the FAA.”  In Westerbeke v. Daihatsu Motor Co., 304 F.3d 200, 220-222 (2d Cir. 2002) (Sotomayor, J.), the Court said that, in light of  Coca-Cola Bottling it was an open question in the Second Circuit whether “manifest disregard of the agreement” was a ground for vacating an arbitral award in a commercial case, whether under Section 10(a)(4), or as an independent ground: 

It may be necessary for a future panel to decide whether the holding of Toys ‘R’ Us remains good law in light of Coca-Cola[].  .  .  .Although Coca-Cola was primarily concerned with the application of the terms of the FAA to actions arising under § 301, its admonition that courts should not conflate inquiries under the two statutes might well apply to the importation into the commercial arbitration context of a ground for vacatur developed in the § 301 context.  We may be especially reluctant to recognize an additional non-statutory ground for vacatur, given that the FAA embodies a strong public policy favoring arbitration as an alternative means of dispute resolution.

We need not decide this question today, however, because, even assuming the applicability of this doctrine, Daihatsu has not met its burden of showing that the arbitral award was issued in manifest disregard of the [commercial contract].  .  .  . Under our heightened standard of deference, vacatur for manifest disregard of a commercial contract is appropriate only if the arbitral award contradicts an express and unambiguous term of the contract or if the award so far departs from the terms of the agreement that it is not even arguably derived from the contract.  If the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract, the award must stand. 

304 F.3d at 222 (citations omitted). 

As of the date Stolt was decided, the Second Circuit had not decided whether, in view of Coca-Cola, “manifest disregard of the agreement” was a valid basis for vacating a commercial arbitration award, and, if so, whether it was an independent basis for vacatur, or one falling under Section 10(a)(4).  But Stolt at least implicitly endorses the notion that “manifest disregard of the contract,” like “manifest disregard of the law”, can be a basis for vacatur under Section 10(a)(4). 

First, the reasoning of the Court fully supports that conclusion.  If manifest disregard of the law can be equated with a “failure to interpret the contract at all,” then an award ignoring the contract’s plain and unambiguous terms must likewise equate to such a failure.  Parties to a contract certainly should not be deemed to agree in advance to delegate to the arbitrators the power to make a new contract for them or to ignore the clear and unambiguous terms of the contract they were charged to “interpret.”   Ignoring the clear and unambiguous terms of a contract in the guise of “interpretation” is the functional equivalent of not interpreting the contract at all. 

Second, in the course of finding that the manifest disregard standard had not been met, the Court concluded that “Stolt-Nielsen’s challenge to the .  .  . Award therefore boils down to an argument that the arbitration panel misinterpreted the arbitration clauses .  .  .  ,” and that the Court was “loath to disturb” an award on the basis of mistake in contract interpretation.   In supporting that argument, the Court cited, among other things, Westerbeke, characterizing it as “holding that ‘vacatur for manifest disregard of a commercial contract is appropriate only if the arbitral award  contradicts an express and unambiguous term of the contract, or if the award so far departs from the terms of the agreement that it is not even arguably derived from the contract.”  304 F.3d at 222 (emphasis in original).  Westerbeke, of course, held no such thing, because its discussion of this point was based on the assumption that there could be such an animal as “manifest disregard of the agreement” in commercial cases.  See 304 F.3d at 222.  But the Court appears to have endorsed the Westerbeke dictum as controlling law, most likely because it was consistent with the Court’s adoption of Judge Posner’s dictum in Wise. 

Conclusion

While the matter may not be entirely free from doubt, the Second Circuit in Stolt appears not only to have preserved its ability to vacate awards that are in manifest disregard of the law, but also to have endorsed manifest disregard of the agreement as an additional ground for vacatur within the ambit of Section 10(a)(4).  As ironic as it might seem, the Second Circuit has in the wake of Hall Street emerged not only with its manifest disregard of the law standard  intact, but with yet another standard:  manifest disregard of the agreement.

         

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11 Responses to “Hall Street Meets Pearl Street: Stolt-Nielsen and the Federal Arbitration Act’s New Section 10(a)(4)”

  1. […] in  Westerbeke v. Daihatsu Motor Co., 304 F.3d 200 (2d Cir. 2002).  Read the full article here: Hall Street Meets Pearl Street: Stolt-Nielsen and the Federal Arbitration Act’s New Section 10…, Loreee Reinsurance and Arbitration Law Forum, May 29, […]

  2. […] provide some hint of where it stands on this issue when it decides the Stolt-Nielsen case (blogged here and here), which raises the related issue whether imposing class action arbitration is consistent […]

  3. […] arbitration may be imposed on parties whose contracts are silent on that point.  (Posts available here,  here, here, here, here, here, here, here and […]

  4. […] arbitration may be imposed on parties whose contracts are silent on that point.  (Posts available here,  here, here, here, here, here, here, […]

  5. […] arbitration may be imposed on parties whose contracts are silent on that point.  (Posts available here,  here, here, here, here, here, here, here and here.) Once the oral argument transcript is […]

  6. […] the case, including a series of guest-post articles for the Disputing blog.  (Posts available here,  here, here, here, here, here, here, […]

  7. […] on it, including a series of guest-post articles for the Disputing blog.  (Posts available here,  here, here, here, here, here, here, […]

  8. […] of guest-post articles for our friend Karl Bayer’s  Disputing blog.  (Posts available here,  here, here, here, here, here, here, […]

  9. […] Today we take a brief look at Raymond James Financial Serv., Inc. v. Bishop, ___ F.3d ___, No. 09-1038, slip op. (4th Cir. Feb. 22, 2010), a recent example of one of those rare cases.  And we’ll see how how confusion about the scope of Section 10(a)(4) resulting – quite unintentionally – from the United States Supreme Court decision in Hall Street Assoc., L.L.C. v. Mattel , Inc, 552 U.S. ___, slip op. at __ (March 25, 2008) apparently motivated the United States Court of Appeals for the Fourth Circuit to decide the case solely on the ground that the arbitrators were not authorized to rule on the claim on which they admittedly based their award.  (See, generally, “Hall Street Meets Pearl Street: Stolt-Nielsen and the Federal Arbitration Act’s New Section 10(a)(….”) […]

  10. […] arbitration agreements are silent on that subject?  You can read our prior posts on Stolt-Nielsen here,  here, here, here, here, here, here, here,  here, here, here, here, here and here.  (Certain […]